San Bernardino expects 'death' if bankruptcy protection lost

SAN BERNARDINO -- In a city where nearly every important decision divides officials into two camps, one goal has the passionate support of nearly every policy-maker: Get the court to approve bankruptcy protection.

As the City Council considered a cuts-filled budget plan, the need to satisfy bankruptcy court loomed over the discussions of how to bridge a budget gap generally pegged at $45.8million.

And since the council passed it Monday, the City Attorney's Office and others have worked nearly nonstop to incorporate the plan into a filing due today at the U.S. Bankruptcy Court in Riverside - arguing, essentially, that San Bernardino deserves to be in bankruptcy court.

Judge Meredith Jury is expected to rule on part of that issue on Dec. 21.

So what's at stake?

The survival of the city, according to both Mayor Pat Morris and City Attorney James F. Penman.

"We're talking about the national fiscal cliff," Morris said. "We're in free fall over our own fiscal cliff, and the only net we have at the bottom of our own fiscal cliff is Chapter 9. Without it - that's death."

Only the legal protection afforded by being in bankruptcy court stops those owed money from taking it out of the city's bank accounts - leaving far too little to pay employees - and seizing leased items, including vehicles and dispatch equipment for the police and fire departments, Penman said.

"Copiers, fax machines, all those things necessary for running the office, most of our city vehicles - we don't own them. Most of them are leased," Penman said. "That would take several weeks to accomplish. Before that, they'll get writs to attack the city's bank accounts, and that'll finish us."

None of the few California cities to file for bankruptcy have been found ineligible, but that's hardly a guarantee, Morris said.

Of the two larger cities to file in recent years, Vallejo spent months and millions of dollars before convincing a judge that it qualified for bankruptcy protection, and Stockton is also battling employee unions who say it shouldn't qualify.

Two creditors have filed what Jury called serious challenges to San Bernardino's eligibility. The city will respond in the document due today.

Its largest creditor, the California Public Employee Retirement System - which San Bernardino owes $143 million - seemed to accept that the city is in some financial distress in its objection filed Oct. 24.

"The city appears to be operating postpetition at a substantial deficit and has so far been unable to produce a budget that covers its ongoing operating expenses, let alone allows it to pay any prepetition claims," wrote CalPERS attorneys Michael Gearin and Michael Lubic.

But they say in the same document that it's impossible to determine whether the city meets the bankruptcy eligibility requirements because it hadn't provided reliable financial information or - until Monday - a plan for how it would adjust its debts.

And a day after the council passed its pendency plan, setting out projected spending during the bankruptcy proceedings, CalPERS' attorneys asked Jury to lift a stay that prevents them from suing the city in bankruptcy court for pension payments San Bernardino hasn't made and doesn't plan to until next fiscal year.

CalPERS spokeswoman Amy Norris declined to speculate on what would happen if the city was found ineligible for bankruptcy.

In addition to basic requirements like being a municipality such as a city, Chapter 9 bankruptcy requires being insolvent - "unable to pay its debts as they come due" - and having a plan to adjust debts.

Unlike in other cities, only one of San Bernardino's employee unions - San Bernardino Public Employees Association, representing middle managers - is fighting the bankruptcy filing.

Union leaders did not return repeated phone calls or emails asking for comment but their Oct. 24 court objection to the filing suggests they believe the city has options other than bankruptcy.

"The city's attempt to exclusively impair obligations owed to the public sector, its failure to come to the bargaining table and its refusal to take part in the AB 506 (pre-bankruptcy negotiation) process reveals the nature and purpose of the petition: to scapegoat public employees for its political, organizational and financial failure," wrote attorneys Dennis Hayes and Christopher Conti on behalf of the union.

They point to suggestions made by consultant Management Partners in 2007 and repeated warnings of pending bankruptcy that weren't acted upon as evidence of bad faith. Current city officials disagree on what could have been done about those suggestions, but generally agree no such changes could save the city now.

When the council was first presented with documents arguing there was little choice but to declare bankruptcy, that July 10 vote drew a "no" from Councilmen Chas Kelley and Fred Shorett and an abstention from Councilman John Valdivia.

Valdivia has since said he "has no reason to doubt" the picture other officials paint, and Shorett has changed his mind.

"I voted against it the first night because I didn't think we could get into bankruptcy, because I didn't think this council was capable of making the tough decisions that needed to be made - and they almost weren't," he said, referring to Monday's 5-2 vote for the pendency plan. "But we made it."

Shorett said he didn't know what the "untracked territory" of being rejected by bankruptcy court could bring, but hoped it didn't come to that.

Kelley, who reiterated his opposition to bankruptcy when he joined Valdivia in voting against the pendency plan, did not return calls Thursday.

But a two-thirds supermajority of the council seems to accept what needs to be done, said Penman.

"There are a lot of things we're not going to like," Penman said. "But the question is: Is it worse to dissolve and have the county take over?"

County officials haven't taken any steps to prepare for the county seat potentially disincorporating, although they have given themselves the option of fighting the city's stay and suing the city over $1.5 million in unpaid landfill tipping fees, said county spokesman David Wert.

"The fact of the matter is the county has an obligation to its taxpayers to pursue any debts that are owed to the county," Wert said. "The county is certainly not in the business of propping up anybody."

No California city has disincorporated in recent decades, and none has been close to San Bernardino's size, said Karen Rollings-McDonald, executive director of the Local Agency Formation Commission for San Bernardino County, which is responsible for areas of the county becoming cities or vice versa.

"I've never heard of a city of 200,000 disincorporating," Rolling-McDonald said. "To me, it's almost mind-boggling how you would unravel that."

She said the agency had looked up disincorporation statutes because of San Bernardino's situation.